Some analysts warned investors to be cautious but some investment houses said investors should not be too bearish as the market will pick up next year.

Investors are "locking in profits earlier than usual for the year and not opening any new positions until the new year," said Andrew Clarke, director of trading at Mirabaud (Asia)

Clarke said the profit-taking could last a while, though some investors may look at stocks like Tencent after the correction and decide to go long for next year.

"Eventually, as profit-taking subsides, buying for the new year will appear as people look toward 2018," he said.

Tencent, which accounts for almost a third of the HSI's 2017 gain, has tumbled 14 percent from its record high at HK$430 last month and closed at HK$366 yesterday.

Veteran stock analyst Shum Chun-ying said Tencent could fall to HK$360 by the end of the month, while Freeman Securities managing director Kwok Sze-chi said it could fall to HK$365, or as low as HK$340.

Shum also said the Hong Kong stock market is most likely to have reached its peak this year and the HSI may fall below 28,000 by the end of the year.

He said the H-share index dropped more than the HSI yesterday. The H-share index in Hong Kong slid 2.6 percent.

Meanwhile, the Shanghai Composite Index fell below 3,300 for the first time since August, amid expectations that central banks will tighten liquidity, pushing interest rates higher.

Daniel So, a strategist at CMB International Securities, said the decline in Shanghai could be weighing on shares in Hong Kong, along with the profit-taking in top-performing stocks like Geely and Sunny Optical.

So remains bullish on Hong Kong equities, saying this correction should not last too long and the HSI may rise to 35,000 next year, while the H-share index might reach 14,400.

Other Asian markets also tumbled yesterday, with Japan's Nikkei 225 index and South Korea's Kospi among the hardest hit.

Japan's Nikkei share average fell 2 percent - its biggest daily fall since March 22 - to a near three-week low of 22,177.04.

It was a clear break from its 25-day moving average. The average stood at 22,514 yesterday.

South Korea's KOSPI also weakened as foreign investors became net sellers of local equities after a sell-off in technology stocks on Wall Street overnight.

The Korean won and bond yields fell. The KOSPI was down 35.75 points at 2,474.37.